By Angus MacNee, CEO of ValidPath
From a geopolitical perspective to the perspective of an 18-month old child (and everything in between), independence or being independent is important. That is, as per a common definition of ‘independent’, being ‘free from outside control; not subject to another’s authority’ and ‘not influenced by something’ is important.
In the context of the financial advice sector, it therefore makes sense that the term “independent financial adviser” was coined to describe those that were not aligned to a particular insurance company or bank. The history goes back to the late 1980s when the UK government introduced polarisation, a regulation that forced advisers to choose either to be an independent practitioner or aligned with an insurer or product provider. In 2013, this was followed by RDR regulation which resulted in the distinguishment between two types of financial adviser – independent or restricted. These new rules meant that advisers had to set their own fees based on the services that they provided to clients and would no longer be eligible to receive commission. This was a big change for the industry, however, it was intended to be (and has been) a positive change for clients as they very clearly know what they are paying for and the services they should receive.
What is independent financial advice?
Independence is ‘freedom from, and not being connected or influenced by, outside control’. For independent financial advisers, independence is therefore being unconstrained in how they can serve their clients. So focusing on servicing their clients in their best interests. This contrasts to (obviously) not being independent and therefore ‘restricted’ in the products and solutions that can be offered to clients.
Restricted vs independent
Restricted advice is not inherently bad, it is simply based on recommendations from a set list of products, platforms and solutions, which may not necessarily be the best fit for the individual. However, with appropriate client segmentation, restricted advice can be beneficial for a particular and relevant service, and likewise when it comes to charging structures (or increasing margins and mitigating increasing regulatory and business costs).
Yet, all things considered, it is clear that independent financial advice is inherently better suited to supporting a broader spectrum of people to achieve their goals. Independent financial advisers generally have access to ‘all the tools in the tool shed’ to serve clients in their best interests and are also better suited to adapt more quickly in a changing regulatory environment (in comparison to a restricted approach that will need to adapt their specific product offering, if they ever do).
Indeed, independent financial advisers like Tom Parmiter at Harken Financial, an Appointed Representative of ValidPath, believe that independent financial advice is better for clients as the financial planning journey does not start with any preconceptions. It does not start with a particular product or provider in mind that can cloud analysis of a client’s current – potentially suitable – situation. It enables the adviser to focus solely on their clients’ goals and objectives, and how best to achieve them. No two clients are the same and this should direct how a business model is structured; a client’s situation is bespoke and as a result, their advice should be bespoke, too.
Independence and the future of financial advice
When you consider the iconic (and mega successful) consumer-facing brands, products and services these days (e.g. Apple, Tesla, etc), it is generally the case that they are completely customer-centric in everything they do, and are always looking for ways to better serve customers and improve their lives. That is, the ‘winners’ are completely customer-centric, and this is increasingly important in the marketplace to satisfy changing consumer expectations. In the context of financial services, it is difficult to recognise this approach amongst the successful legacy brands and companies particularly when innovation and a customer-focused mindset can directly cannibalise their core business model.
When you think about the process for providing financial advice, it is based on understanding the client’s objectives, circumstances and ‘attitude-to-risk’, implementing a suitable recommendation to support those considerations and then monitoring and adjusting for ongoing suitability. Suitability, therefore, is the key with financial advice. If the advice and product or portfolio implementation is more suitable, then it is more likely to deliver a better client outcome, and to do so with less risk.
The future of financial advice therefore needs to optimise for client suitability, and, in the changing consumer marketplace, be customer centric. If you accept this conclusion, then it is logical that independence is everything, and independence of advice and independence of business model is the best framework to support positive client outcomes in the long-term.